Debtor-nation Status: U.s. Has Been There Before

March 31, 1985|by FRANK WHELAN, Sunday Call-Chronicle

Sometime on the afternoon of Aug. 5, 1914, a harried Wall Street investment banker stopped briefly to answer a reporter's question. Since July 31, the American financial community had watched in horror as the nations of the old world plunged toward World War I. The delicate web of international high finance that had made Europe - primarily Great Britain - the world's banker appeared torn beyond repair. Assumptions about credit and banking, the accepted wisdom of generations, were suddenly worthless. With Wall Street markets closed and international credit at a standstill, the public was hungry for answers. And it was this hunger that brought the reporter to the banker's door.

If he was expecting to hear a tale of woe, the reporter must have been disappointed. The banker spoke with the authority of a man who knows how the world works. "We have food supplies," he said, "and other necessities which Europe must obtain, and as nations over there cannot allow themselves to starve to death, they will find some means of obtaining what we can sell." Admitting he did not know the details of how this would work, the banker nevertheless believed "a plan will be devised."

Then he reiterated his confidence in the future. "We have the situation very well in hand, and I have no fear of the outcome. That will stimulate things, and we shall all feel cheerful in the not-distant future. For the present, we shall endeavor to meet conditions as they arise from day to day." Perhaps the banker was just trying to calm public fears. In reality, his words were to prove prophetic. As that story went ticking out over the wires into America's newsrooms, the financial shape of the world was already changing.

In 1914, foreign investors owned $7.2 billion in U.S. assets while the United States held only $3.5 billion outside its borders. As it had been since its birth, the United States was still a debtor nation. But by war's end, things had changed radically. The export of farm crops and the allied gold shipments that paid for them, coupled with extensive public and private loans, had made the United States a major creditor nation. By 1919, the rest of the world owed the United States $13.7 billion. As time passed, the status of the United States as the world's largest source of capital became a given. It was a position America was to hold for the next 66 years.

On March 19 of this year, the headlines spoke of the end of an era. America's status as a creditor nation was said to be almost over. The day before, the U.S. Department of Commerce announced a record trade deficit for 1984 of $101.65 billion. Secretary of Commerce Malcolm Baldrige said the country probably "moved into the red" in the first quarter of 1985.

Although the United States had not actually exported more goods than it has imported since 1976, it had managed to cover these deficits by a surplus in "services," partly from U.S. earnings of interest and dividends overseas. But the strong dollar that keeps American-made goods from competing with cheaper foreign imports also lured foreign cash eager to reap a bigger return on its investment. Because the return on the higher real rates of interest is so attractive, what had been a $41-billion surplus on the services side of the trade deficit in 1981 was reduced to a $16.99-billion surplus in 1984.

What this trend means is a subject of much speculation. While most economists and economic historians feel that the initial impact is slight, they differ as to what the change from creditor to debtor status holds for the future.

Dr. Gerald G. Eggert, professor of business and labor history at the Pennsylvania State University, takes the long view. "I think that, generally, people are a little alarmist over the situation. We were a debtor nation until World War I and had tremendous growth." At the same time he admits that the growth had a cost. It was punctuated, says Eggert, by "periodic depressions."

In that long period of roughly 130 years, the almighty British pound, through investment banking houses like Baring Brothers, built railroads and canals and invested in state bonds. It was a risky business in many cases. Fraud was common, and state governments - Pennsylvania was one of the most notorious - defaulted on their debts with regularity. In the 1840s, English novelist Charles Dickens, among others, lost a fortune in defaulted Illinois railroad bonds.

In the post Civil War years, things had settled down somewhat. From 1865 to 1873, the United States ran a trade surplus of imports over exports. In the period of 1874 to 1914, with the exceptions of the years 1875, 1888, 1889, and 1893, record shipments of American grain created a trade surplus in the United States' favor.